Fundamental analysis

Fundamental analysis is the detailed assessment of a firm's future or growth which gives a fair idea about its worth in the stock market. This involves examining the company's financials and operations, especially sales, earnings, growth potential, assets, debt, management, products, competition and all the financial aspects dealing with a company's performance and survival. This done to gain insight on a company's future performance. Fundamental analysis takes into consideration only those variables that are directly related to the company itself, rather than the overall state of the market or technical analysis data.

The outcome of fundamental analysis is a value of the stock of the company called its ‘intrinsic value’ also known as ‘target price’. To a fundamental investor, the market price of a stock tends to revert towards its intrinsic value. If the intrinsic value of a stock is above the current market price, the investor would purchase the stock because he believes that the stock price would rise and move towards its intrinsic value. If the intrinsic value of a stock is below the market price, the investor would sell the stock because he believes that the stock price is going to fall and come closer to its intrinsic value. To find the intrinsic value of a company, the fundamental analyst initially takes a top-down view of the economic environment; the current and future overall health of the economy as a whole. After the analysis of the macro-economy, the next step is to analyze the industry environment in which the firm is operating. After which, one should analyze all the factors that give the firm a competitive advantage in its sector, such as, management experience, history of performance, growth potential, low cost of production, brand name, etc. Thus, fundamental analysis is all about evaluating a security's value based on an authentic set of information, both historical and present.